Miners Love Bonds for Deals With Yield Gap at 4-Year Low: Australia Credit
Equinox Minerals Ltd. (EQN), bidding C$4.8 billion ($4.9 billion) for Lundin Mining Corp. (LUN), is considering a debut bond sale as Australian resources companies pile into capital markets to finance production at the lowest relative yields since 2007.
Equinox, coal miner Aston Resources Ltd. (AZT), copper producer OZ Minerals Ltd. and Fortescue Metals Group Ltd. are among the companies considering bond sales, following on last quarter’s record offerings. Equinox said March 3 it may sell bonds and debt convertible into equity, while Aston said the same day it is considering a debut offering of as much as $500 million.
Mining companies in Australia are racing to buy operations and build mines to take advantage of near-record prices for coal, iron ore and gold. The extra yield investors demand to hold the debt of resource companies instead of similar-maturity government bonds dropped 64 basis points, or 0.64 percentage point, since Sept. 1 to 154 basis points, according to Bank of America Merrill Lynch indexes. The spread on Australian corporate debt shrank 54 to 165, while international dollar bonds narrowed 26 to 101.
“In Australia, the more corporate mining companies issue, the better it is because the corporate markets are mainly driven by banks and financial institutions,” Kumar Palghat, who helps manage the equivalent of $3.5 billion at Kapstream Capital in Sydney, said by phone. “People would like to buy non-financial assets and there will be a good appetite for it. We’d have an interest in them.”
This year marks the most aggressive start since 2008 for acquisitions, with $11.1 billion of bids this quarter, data compiled by Bloomberg show. That came after Australian commodities and energy companies sold $6.5 billion of bonds in the final three months of 2010, the most since Bloomberg began compiling the data in 1999.
Equinox will consider credit lines and convertible and high-yield bonds, Carl Hallion, the company’s vice president of business development, said March 3 in a phone interview from Toronto. Equinox bid C$8.10 per share in cash and stock on Feb. 28, trumping a bid from Inmet Mining Corp.
“You really couldn’t have done this deal six months ago, even if you wanted to, you couldn’t have put this structured package together,” Hallion said. Demand for mining company bonds “has been growing steadily over the last 6 to 12 months,” he said.
His comments echo those of Aston Resources Chief Executive Officer Todd Hannigan, who said in Sydney on the same day that U.S. dollar-denominated bond markets represent the best option for funding the company’s plan to spend A$463 million building the Maules Creek coal mine that will produce 11 million metric tons a year of coal.
“That market is very, very open at this time with very competitive rates,” Hannigan said.
A sale of $500 million would surpass Griffin Coal Mining’s 2006 offering of 10-year debt as the largest sale by an Australian company with a market worth of less than A$1 billion, Bloomberg data show.
Fortescue, the Perth-based miner controlled by Australia’s richest man, Andrew Forrest, said in January it may raise $2.5 billion of debt, including through bond sales, to fund expansion of its iron ore mines. OZ Minerals Ltd. may sell bonds for the first time as it seeks longer-dated debt to fund investment, Chief Financial Officer Andrew Coles said in January.
Global mining and energy deals are poised for the biggest first quarter since 2008, according to data compiled by Bloomberg. There have been 576 deals announced valued at $121.5 billion, with 74 worth $11.1 billion in Australia, the world’s biggest shipper of coal and iron ore.
Fixed-income investors are snapping up bonds sold by raw materials producers, lured by coupons such at the 11.5 percent paid on $335 million of seven-year notes sold by Midwest Vanadium Pty Ltd. last month, and confidence that companies can afford to meet their obligations.
Equinox wants to refinance its $3.2 billion bridge loan to mostly convertible and high-yield bonds within three months, Hallion said. The convertible bonds would be mostly three- to five-year maturities and the high-yield bonds would have terms of seven to 10 years. It plans to sell bonds in the U.S. and will seek a credit rating, he said.
Bonds can provide greater certainty for a borrower than loans by locking in costs over longer periods, said Peter Chilton, a fund manager at Constellation Capital Management Ltd.
“Often if you’re taking finance from a bank, you’ve got to roll it over in a short period of time, every five years or less,” he said by phone from Sydney. “It is like buying peace of mind and certainty. If you’ve got to build a project, you want funding before you start and you might need funding several years down the track to complete that project.”
Australia expects to earn a record A$220.6 billion from exports of commodities in the 12 months ending June 30 as faster economic growth in China boosts demand for raw materials. China’s economy expanded 10.3 percent in 2010, the quickest pace in three years.
The Australian dollar climbed 11 percent in the past six months to $1.0123, touching a record $1.0256 on Dec. 31. The Reserve Bank of Australia raised its forecast last month for 2011 growth to 4.25 percent, from a November prediction of 3.75 percent.
The boost from commodities has cut Australia’s jobless rate to 5 percent, compared with 8.9 percent in the U.S.
Australian five-year government bond yields climbed 75 basis points, or 0.75 percentage point, to 5.33 percent over the past six months as the Reserve Bank of Australia carried out seven interest-rate increases between October 2009 and November 2010 to curb inflation. Yields exceed those on similar-dated Treasuries by 315 basis points, down from last year’s peak of 406 in November.
The gap between yields on Australian government bonds and inflation-indexed notes show investors expect consumer prices will rise an annual 2.92 percent for the next five years, the fastest among eight developed nations tracked by Bloomberg. The so-called breakeven rate on inflation-linked debt jumped from 2.22 percent on Sept. 1.
Midwest Vanadium’s U.S. dollar bond sale dwarfed 34 loan accords reached by small Australian mining companies over the past three years, according to data compiled by Bloomberg. Midwest is rated B3 by Moody’s Investors Service and B- at Standard & Poor’s, six levels below investment grade.
The largest credits for a resources company worth less than A$1 billion was A$240 million of financing for coal miner and construction company MacMahon Holdings Ltd. (MAH), compared with an average loan size of about A$55 million.
Midwest Vanadium, whose parent company Atlantic Ltd. (ATI) is valued at A$214 million, sold bonds maturing in February 2018 to yields 843 basis points more than similar-dated U.S. Treasuries. Atlantic, which last year bought the Windimurra vanadium mine once owned Xstrata Plc, said strong investor demand in North America is helping to fill a funding gap being left by Australian banks.
“Australian commercial banks aren’t lending into the commodities sector,” Michael Minosora, managing director of Perth-based Atlantic, said in an interview on March 2. “North American funds in particular were known to be short in the metals and mining space, so they needed to put back some sort of balance.”
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